Treasury yields is the percentage return on U.S. Treasury notes or bonds. U.S. Treasury notes or bonds are sold by the U.S. Treasury Department to pay for the U.S. debt. Buyers buy the bonds at a fixed interest rate (the yield or coupon rate); however the value of their bonds will vary depending on the current yield prices, which change daily. The U.S. Treasury publishes the yields for all of these securities daily on its website.
Why does the bond’s value change?
Bonds are initially sold at auction by the Treasury Department, which sets a fixed face value and interest rate (yield). However yield prices change daily depending the demands of the bonds. For instance, when the demand for bonds drop, bond prices drop; as a consequent, yields increase because the government will only pay back the original face value plus the stated interest rate.
What is the Purpose of Bonds?
Bond buyers are lending money to bond’s issuer (in the case of U.S. Treasury notes or bonds, the US government), who promises to pay back the principal (or par value) when the loan is due (on the bond’s maturity date) and also pay periodic fixed rate interest payments (based on the fixed rate yield or coupon rate at time of purchase).
What happens to the value of the buyer’s bond if the market’s interest/yield rate goes up (yet the buyer’s bond’s coupon rate/yield rate remains fixed)?
- Buyer purchases a bond at its par value (principle value) of $1000 carrying a 7% yield or coupon. Meaning the bond would pay $70 in interest.
- Later in the year, interest rates (yeilds) go up to 8% on the $1000 bonds ($80 a year in interest).
- The bond the buyer purchased at 7% yield is now valued at a lower price -a discount – of only $875.
What happens to the economy when Treasury Yields go up
- Interest rates on consumer and business loans go up
- Higher yields can increase the value of the dollar
- Higher fixed-rate mortgages (10-year yield affects 15-year mortgages, and the 30-year yield impacts 30-year mortgages) housing less affordable, depressing the housing market because it means you have to buy a smaller, less expensive home.
- Slows GDP
- Feds raise the Fed funds rate.
- When Federal Reserve increases its target for the federal funds rate (in other words, if it tightens monetary policy), or even if investors merely expect the fed funds rate to go up
- In 2013, yields rose 75% between May and August alone. Investors sold off Treasuries when the Federal Reserve announced it would taper its Quantitative Easing policy. In December, it began reducing its $85 billion a month purchases of Treasuries and mortgage-backed securities. The Fed cut back as the global economy improves.
- When yields are high, it means investors don’t want the debt, so the country must pay more to get them to buy it. This can be a downward spiral. High interest rates make it more expensive for the country to borrow. This increases fiscal spending, which creates a larger budget deficit, which creates more debt.Yield Rates stay low when
- Foreign investors, notably China, Japan and oil-producing countries, need dollars to keep their economies functioning. The best way to collect dollars is by buying Treasury products. The popularity of Treasuries have kept yields below 6% for the last five years.
- There is economic uncertainty
- mortgage interest rates are low
- There s a lot of demand for the debt